Greetings, and welcome to the RingCentral Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Ryan Goodman, Head of Investor Relations.
Thank you. You may begin.
Thank you. Good afternoon, and welcome to RingCentral's 2nd quarter 2020 earnings conference call. I am Ryan Goodman, RingCentral's Head of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO Anand Aswaran, President and Chief Operating Officer and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anand and Mitesh followed by Q and A.
Some of our discussions and responses to your questions will contain forward looking statements, including our Q3 and full year 2020 financial outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. In particular, our business is currently being impacted by the COVID-nineteen pandemic.
The extent of its continued impact on our business will depend on several factors, including the severity, duration and extent of the pandemic, as well as actions taken by governments, businesses and consumers in response to the pandemic, all of which continue to evolve and remain uncertain at this time. RingCentral assumes no obligation and does not intend to update or comment on forward looking statements made on this call. Unless otherwise indicated, all measures that follow are non GAAP with year over year comparisons. A reconciliation of all GAAP to non GAAP results is provided with our earnings release and in the slide deck. I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, our GAAP to non GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral.
For certain forward looking guidance, a reconciliation of the non GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website. With that, let me turn the call over to Vlad.
Good afternoon, and thank you for joining our Q2 earnings conference call. We hope all of you are safe and in good health. The pandemic has created unprecedented global challenges and is having a transformative impact on how businesses operate now and in the future. Cloud transformation of business communications platforms has become a priority as companies adapt to a work from anywhere environment. Businesses of all sizes now require communication solutions where employees can work productively with customers, partners and peers from anywhere on any device and in any mode.
We embarked on this journey of enabling cloud migration of business communications over a decade ago. RingCentral is now uniquely positioned to meet this demand with our enterprise proven, global and trusted unified message video phone or MVC platform. The results speak for themselves. We delivered a strong Q2 as we continue to benefit from strong contributions from mid market, enterprise and our channel partners. Let me highlight some recent key events.
1st, we announced an expansion of our strategic partnership with ADAS. 2nd, together with Avaya, we announced a further global rollout of Avaya Cloud Office by Recential. 3rd, we saw good uptake on our new RCC offering, which we launched in early April. We'll talk more about this later. And lastly, we were humbled to learn last quarter that RingCentral has been named to the 4th Global 2000 List, putting us alongside the biggest and most valuable companies in the world.
As to our financial performance, revenue and non GAAP EPS exceeded our guidance. Key drivers continue to be mid market, enterprise and channel. We delivered a record number of 7 figure TCV wins this quarter. Several of these large wins were in our targeted verticals of health care, financial services and education and also included multiple international wins. Key metrics for Q2 were solid across the board.
Total revenue grew to $278,000,000 This is a 29% increase year over year and is above the high end of our guidance range. Importantly, total annual return revenue, or ARR, grew 33% year over year to $1,100,000,000 The difference between overall revenue growth and higher ARR growth is driven by higher adoption of RingCentral app relative to sale of new desktop devices. We believe the strong Q2 results first validate RingCentral as the intuitive platform in the global UCaaS market. We look forward to building on this momentum and expanding our market reach to maximize the opportunity ahead. On that note, we recently announced that RingCentral will be the exclusive UCaaS provider to Atos Unified.
Unified, formerly Siemens Enterprise Communications, was acquired by Atos in 2016. Approximately 60% of their on premise installed base of 40,000,000 users is in Europe with a strong presence in Germany. This opportunity is in addition to our system integrator relationship announced earlier as part of the Atos digital workplace portfolio. Importantly, during the last few months, Atos and RingCentral saw a pent up demand to address unified installed base together. Atos has accelerated its reseller outreach efforts and now has more than 90 channel partners' strength to sell the new Unified Pocket Biodes Central or UO.
We expect to be live with UO in 11 countries by the end of the year. This includes Germany, France, Spain, Italy, Netherlands, Austria, Belgium, Ireland, U. S, U. K. And Australia.
We're also excited to welcome Atos as a direct customer to the UniFi Office solution. Addus will start with deploying Duo to the 5,000 strong employee base of its Addus UCP division, formerly Unifi. ADASUS will later expand UO to their entire base of over 100,000 employees. As to Ava, based on joint channel enablement efforts and 1st joint customer wins with Avaya Cloud Office or ACO, we are quite pleased with the early progress of this partnership. There are now over 2,000 channel partners on board.
There is a robust pipeline building and several important large deals already on the books. An example of a large joint win was a selection of our platform by a large BPO that supports the U. K. Government COVID-nineteen training program to control the spread of the virus. In this highly urgent and critical use case, the solution leveraged RingCentral's open API platform and was rolled out to multiple thousands of users in approximately 6 weeks.
In June, ACO was launched in Australia, Canada and the U. K. Several new features and additional migration tools were also released in June, which will make cloud migration even more seamless moving forward for large customers. Of course, our success with these great partnerships is rooted in our leading comprehensive message VDF phone or MVP platform. It is only by enabling their employees to communicate via any mode from any device and from anywhere that businesses can stay productive during these prime times.
To that end, we saw double digit growth in messaging and triple digit growth in video and mobile voice minutes on our MVP platform quarter over quarter. Speaking of Vidya, our new open, standards based RingCentral Vidya or RCE platform has been quickly evolving since its launch in the beginning of April. Feedback and customer reception has been very positive, and we already have over 10,000 paid RingCentral Office accounts enabled with RingCentral Video. Building on the successful launch of RingCentral Video in June, we announced the initial release of RingCentral Rooms. This extends the power of RingCentral BGS to conference rooms and meeting spaces, which remain important even in these trying times.
Overall, we are proud to be able to assist in the fight against a global pandemic. Our mobile first enterprise communications platform, combined with our open integration API, has enabled major institutions like State of West Virginia to rapidly deploy our solution with embedded communication capabilities for thousands of contact tracers to reduce the impact of the pandemic. In summary, RingCentral has always been committed to enabling workforces to productively communicate and collaborate via any mode on any device from anywhere. And with the new world order, working from anywhere is no longer a nice look at. It is now a hard necessity.
RingCentral is now becoming a platform for business engineering. With our well proven MVP global solution and our rapidly evolving strategic partners and reseller ecosystem, we are confident that the cloud will continue to win and RingCentral will continue to win in the cloud. Now I will turn the call over to our President and Chief Operating Officer, Anand Aslaran. Thank you, Vlad. Good afternoon, everyone.
Operationally, Q2 was a very strong quarter. We are laying the foundation for the next phase of sustainable multiyear growth. The business is thriving and the demand for our cloud based business communication solutions is higher than ever. Our open integrated MVP platform enabled us to add more new customers in Q2 than any other quarter in history. Interestingly, this was accomplished without requiring much physical travel for our sales and professional services organization.
There was broad strength across a number of important segments and initiatives. In the Enterprise segment, we saw a record number of 7 figure PCB wins. We also had a very strong quarter for our contact center portfolio, which was included in approximately half of our 7 figure wins. Our channel plays a strong role in our success. Channel ARR increased 60% year over year to $375,000,000 As we continue to grow to become a multibillion dollar revenue company, we are expanding our strong foundational focus on the 4 P's: product, people, processes and partners.
These efforts will enable us to serve our customers' needs even better, especially in targeted vertical markets. Let me share some more detail. 1st, in the product area, innovation was and remains our first principle. We launched RingCentral Video, RingCentral Rooms and together with Avaya, we launched Avaya Cloud Office by RingCentral with subsequent international expansion. I would also like to highlight that this velocity of innovation happened with most of our development teams working remotely.
2nd, on the people front, we have continued to expand our management team, attracting top talent, including incredible industry leaders like Chief Revenue Officer, Phil Sorjan and our Chief People Officer, Boonjan Agarwal, who we announced recently. Attracting and retaining a strong and diverse pool of talent is so vital to our long term success and it is a priority for our management team. On that note, hearty congratulations to Vlad for recently being named amongst the top 2 CEOs for diversity and amongst the best CEOs for women in the annual Comparably survey covering 60,000 organizations. Regarding business processes, we are making great progress to automate and digitize our end to end process and operations as a foundation for scale. This will enable us to apply AI and machine learning to better predict customer needs and deliver enhanced and proactive value to our customers.
Now let's talk partners. 1st, Vlad shared the details on the strategic partner front with Avaya and Atos, which helps us to further scale our global reach and capture the massive opportunity ahead. 2nd, we continue to see strong performance from our service provider partnerships led by a renewed momentum with AT and T. And finally, we also continue to invest in our channel partners ecosystem. During the quarter, we launched Ignite, a new partner program.
This program enables partners to own the entire sales cycle with their customers. Overall, our partners contributed to over 70% of our 7 figure wins in the quarter. Let me bring that to life with a few great customer examples. One example of a marquee channel win in Q2 is Marvel Technology, a leading global semiconductor company. Marvel needed a highly reliable, scalable and a global communications platform to replace their legacy on premise systems.
Our mobile first platform, our global coverage and integration with other enterprise solutions were important differentiators in securing the 6,500 plus user win spread across 20 plus countries, including India and China. Another notable channel win was with 1 of the largest custom print apparel companies. They needed a tightly integrated cloud based communications and contact center solution. This is an 800 plus user UCaaS win combined with over 250 RingCentral contact center seats. As we expand our go to market motions, we are finding compelling new opportunities across several important verticals.
In healthcare, we had a 7 figure upsell win at a leading U. S. Provider of behavioral healthcare services. This important customer is using our unified communications platform to better operationalize their business across the country. In Q2, we expanded by 50 percent to over 7,500 users as they continue to roll out RingCentral across their increasingly distributed workforce.
In education, a large globally renowned U. S. University expanded their views of RingCentral's office with an additional 1500 users added during Q2. This is a great example of the opportunities emerging due to COVID where we saw an accelerated deployment cycle at this university with tens of thousands of potential users still ahead of us. There is higher usage of our RingCentral apps versus desktop phones, which is a positive indicator of better user engagement.
In addition, the implementation has been accelerated to ensure seamless continuity for the upcoming school year. In Financial Services, we secured a 2,500 user win across 15 countries with a large private equity firm. From this customer, our rich platform capabilities, service quality, security and global reach were key competitive differentiators. Finally, last year, we highlighted an engaged digital win with a large air transportation company. Over the past year, we've demonstrated the value of our RingCentral platform in helping to transform the company.
This transformation became more urgent in the face of COVID-nineteen with the workforce moving to work from home. In Q2, we saw a trifecta. 1st, the customer extended to our UCaaS solution with 2,400 RingCentral Office users. Then, they further expanded their CCaaS footprint by 60 agents. And finally, they consolidated all of their digital point solutions to the RingCentral platform.
It is great to see customers increasingly embracing the value of the full RingCentral portfolio. Today, the cloud transformation of communications is a top priority for every business to meet their enterprise needs at a global scale. With our enhanced focus on products, people, processes and partners, we are in a strong position to be a core part of our customers' digital transformations and address the large opportunities ahead of us. I've been with RingCentral for a little over 6 months now. I'm humbled by our vision, the company's commitment to innovation and our incredible people centric culture.
I'm excited to be a part of the next phase of RingCentral's growth journey. Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv. Thank you. Thanks, Anand, and good afternoon, everyone. Q2 was a solid quarter on multiple fronts.
First, ARR for our flagship UCaaS solution, RingCentral Office, surpassed $1,000,000,000 for the first time and grew 36% year over year. 2nd, our overall subscription revenue grew 32% year over year, along with an overall operating margin of over 10%, demonstrating solid profitable growth. This is a testament to the large opportunity and our consistent execution. 3rd, we are winning larger enterprise customers with a record number of 7 figure TCV deals, demonstrating how strong the demand is for our product in the COVID environment. 4, ACO is off to a good start, molding well for the long term opportunity.
And finally, we announced UCaaS exclusivity with Atos Unified, further expanding our global reach and complementing our existing partnerships. Businesses are turning to RingCentral as they transition workforces to a work from anywhere environment. Mid market and enterprise customers defined as 25,000 or more in ARR had another strong quarter with ARR up 50%. Underpinning this strength was bookings growth from new enterprise customers with 100 ks or more in ARR, which was up over 50% sequentially. As it relates to our existing customer base, we mentioned in May that small businesses in verticals like retail, travel and hospitality that account for less than 10% of our overall installed base saw higher churn.
But as the quarter progressed, the churn rate improved consistently, although still not at historical levels. With overall Q2 on solid footing, let's move on to our 2020 outlook. We are encouraged with recent trends, but in this crisis environment, we continue to make prudent assumptions for the remainder of the year. Given Q2's outperformance and our highly predictable recurring revenue model, we are raising our annual guidance. We feel confident in executing to our plan.
So now on to specifics. We expect subscription revenue growth of 28%, up from 25% to 26% previously. We expect other nonrecurring revenue growth of 8% to 12%, reflecting customer engagement shift from desktop phones to RingCentral apps on laptop and mobile devices. We expect total revenue growth of 26% to 27%, up from 24% to 25% previously. We expect non GAAP EPS to be between $0.92 $0.94 up from $0.91 to $0.94 previously.
This includes a $0.01 impact from lower interest income. In summary, the global pandemic has provided a structural catalyst for U. S. Adoption and RingCentral saw stronger demand than ever. Even when COVID is behind us, which we hope happens as quickly as possible, we expect that the new normal for enterprise communications will be cloud first as on premise systems have shown to be inadequate for the needs of businesses.
We believe that the market inflection is past the point of no return, and RingCentral is strongly positioned to take advantage of this trend. We have an industry leading product, a steadfast commitment to innovation velocity as well as a global and diversified go to market reach. Our momentum with AD and T, progress with Avaya and expansion with Atos further enables us to scale our market reach and add incremental layers of long term profitable growth. With that backdrop, we are confident in our ability to lead in this $50,000,000,000 plus UCaaS market. Of course, this would not be possible without our amazing employees, committed partners and loyal customers.
So a huge thank you to all of them. With that, let me turn the call to the operator for Q and A.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. Our first question comes from Brian Peterson with Raymond James. Please state your question.
Thanks, gentlemen, and congrats on the really strong quarter. So, Mukesh, maybe I'll start with you. Given the large revenue beat,
I think we're kind of
used to seeing that, but we actually saw
a big beat on the bottom line as well. So maybe help us understand how you're thinking about the grossmargin balance going forward as you guys head into 2020 beyond?
Yes. Thank you, Brian. Yes, the quarter did progress, As you saw, we did beat the quarter pretty handily. The quarter did progress better than we expected initially throughout the quarter. A lot of the dominoes did fall our way there.
So yes, you're right. So we did beat the subscription revenue by about $11 ish million and then a $5,000,000 of that fell to the bottom line. So close to a 50% margin flow through from the revenue. It really, again, speaks to the unit economics and the inherent leverage we have in the business model, where you can treat this 50% incremental revenue margin as a proxy for our installed base recurring margin. So really strong unit economics there.
And the playbook, Brian, is going to be very similar to the way we have been executing, which is that we will thoughtfully deploy this upside towards innovation and go to market for growth. But meanwhile, we will stay very disciplined with a focus on profitable growth as we have been and promised expansion of 40 to 50 basis points of margin expansion per year.
Understood. Thanks, Mitesh. And maybe a
follow-up for Vlad. I know you
gave some perspective on RingCentral Video, but I guess, we're a few quarters in with RCB. I'd be curious how you would gauge your progress so far? Thanks, guys.
Yes. Good Brian. So to be clear, we're 1 quarter in with RCV, but it's still early. Progress has been quite robust. We are actually seeing a good number of accounts on RCV now.
It's around 10,000 paying accounts at this point. And most new customers are now getting RCB. As we stated when we first launched the product, we expect overall customer base to migrate from RingCentral Meetings, which is powered by another provider to migrate to RCV over time. So that's still the plan. And we are working very hard on making this decision very positive and an easy decision as the product matures.
But so far, so good. It's performing well.
Thank you. Our next question comes from Bhavan Suri with William Blair. Please state your question.
Hey, guys. Can you hear me okay?
Yes. Yes.
Perfect and congrats, solid quarter gents all the way around.
I got 2 questions, maybe first for Mitesh. Mitesh, you've got a
lot of puts and takes here. You've got really solid growth over $100,000 You've got churn improving. Just can you highlight the puts and takes of the quarter and what drove the after payment software and stance
on the puts and takes through the quarter? And then a quick follow-up. Sure, Bhavan. So I will say a couple of things, 2, call it maybe 3 points. So on the quarter, we saw let's start with new logo on the very top.
So we did see strength across the board on new logo. If you look at the enterprise segment, 50% sequential growth is what we saw. So really good strength there. Even in the TCV deals for 1,000,000 dollars we saw 70% of that came from new logos. So that's sort of point 1.
0.2, on the deal side itself are getting larger. And the third one, I'd say, is customers actually are adopting to for a longer duration. So those are the 2 or 3 points on the deal momentum. If you look at the go to market side of it, we are seeing a lot of strength from the channel partners as well, which we grew 60% ARR. If you just combine it all, if you look at the takeaways for these trends, there are a couple of takeaways, I would say.
One is customers are comfortable with a long term commitment to UCaaS during this environment. 2nd is that COVID is becoming a structural positive for us, for RingCentral. And the initial fear, at least when we were modeling the year, was that, hey, there could be just panic buying in Q1 and then the demand fade. We are not seeing that head fade. So that's point 2.
And third is with the demand trends we are seeing, we are definitely adding much higher lifetime value customers with a lot of potential demand and expand. That's really helpful, Majes. And at some point,
be great if you revisited the LCD to CAC at the height of the enterprise. But my second question is for maybe all of you on Endozrad, etcetera. But Microsoft obviously announced Friday or maybe late last week that they're suspending some of their core features around carriers, around distributing calls, by managing that. They don't want to be a carrier anymore. And they said it indefinitely.
Obviously, you also announced integration with Teams. And so look, I view it as
a massive positive. But honestly,
I'm not sure how you all think about what Microsoft announced and the Microsoft partnership from a long term perspective. I don't care near term, but as you view, they're stepping back from sort of competing with carriers and integration of RingCentral with Teams. Vlad, Anand, how do you guys think about what that means for RingCentral over the next 3
do high level and obviously, Arvind being pressured from Microsoft, can perhaps add to this. Look, at a high level, we think that Microsoft complementary strengths toward moving customers' communications from on prem to the cloud. Obviously, we're very, very, very strong in the phone system side of this equation. We speak of MVP, so message video phone system.
And VARTA
is going to
postpone, right? That's kind of where they push down, right, to be clear?
Well, no. But I'm saying outside from RingCentral, right? And Microsoft, again, you need to talk to them directly on what their strategy and goals are. But from what we can tell, they're very, very strong on the messaging side with Teams and less so with phone in particular. So at a high level, it seems it's a positive for us, hopefully positive for the customer as well.
But how the market exactly will take it, I mean, we'll have
to see. Are there anything further this?
No, you said it all, Vlad. I mean, for us, it's very simple. As Vlad said, the details, you guys should talk to Microsoft, but we are doing we are further partnering with them. Direct routing was great. It gives their Teams customers access to the best phone system in the industry.
And on top of it, we are investing more in extending that wide moat of enterprise feature deck for what is already a best class system. So net net, we feel good about it.
That's a problem. I would like to continue, but I won't. Thank you, gents. I appreciate it. Congrats.
I'll pass it on.
Thank you.
Our next question comes from Nikolay Beliov with Bank of America Merrill Lynch. Please state your question.
Hi. My first question is for Mitesh. Congrats on the results here. Q2 results came in line with our fuel check and also a few points to see around second half pipeline. And you guys, I noticed the guys who pre Q on the rest of the year was maybe a little bit more conservative than 2Q.
Just wondering if you can walk us through what you're seeing, what trends you're seeing in the pipeline or churn or new business that causes you to be a little bit more conservative than last quarter?
Sure, sure, Nikolay. Yes, so let's start from the top. So the overall assumption, right, for what we've made is that the macro does not significantly get better than what we experienced in Q2. And to a large extent, the lockdown does continue. So that's the overall thematic assumption.
Now if you take it a click below for guidance, as you pointed out, it's a couple of things. What we have assumed is that the productivity for our salespeople, our sales force does not improve. We saw quite the contrary trend in Q2 where we did see an expansion of our pipeline. We did see increased conversion rates. But given the prudent assumptions we always take, we have assumed lower close rates on our pipeline.
So that's point 1. And point 2, as you also asked on churn and net retention, we've made more conservative assumptions in the back half than we saw exiting Q2. Hopefully, we'll do better than that and the world opens up better. But for now, we are making these assumptions. So we feel really good about the way we are guiding, and we feel good about executing to our guidance.
Thank you. And a follow-up for Vlad and Anand. Can you guys help us contrast and compare the quality of the installed base of Atos versus Avaya? And secondly, the cost to book new business versus comparing Atos versus Avaya and your direct in channel business? Thank you.
That's it for me.
Okay. Let me take maybe first part of the question. So quality,
look, users are users.
So I don't know how you can say quality. But the one thing is with Atos is many more of their customers are direct engagements as opposed to through the channel. So one can think that perhaps it would be sort of I don't know if it's an easier motion, but maybe a somewhat shorter motion to get to those customers. Of course, there is geographical dispersion as well with most of Atasys' customers being in Europe, in Germany in particular. And of course Avaya is a very international, still a U.
S.-centric company. But I have to say, when we were evaluating this opportunity and deciding to do this extra step that we've announced,
it really does seem to
be mostly, if not entirely complementary to Avaya's base. Again, with both cases, the key theme here is converting existing on prem users to the cloud while keeping their traditional brand affiliation. And in as much as users, we don't see that there are too many, if any, customers who would use both Avaya and Atos at the same time. So from that perspective, it seems to be very, very complementary. And if Anand and Mitesh can add on the numbers.
Mitesh should talk about cost. Yes.
I was just Yes. Okay.
Thank you. Now on cost to book, Nikolay, look, I think that's the key part, right? When we look at all these distribution engines for these partnerships, our cost to book is lower upfront because we don't have to spend the initial sales and marketing. Actually, alongside that, the other vector or the other side of the coin is higher lifetime value. Because the channel these partners are incented to hang on to the customers, we are seeing not only lower cost to book, but also a higher lifetime value.
So I think it's a 2 pronged approach there.
Thank you, guys.
Thank you. Our next question comes from Sterling Auty with JPMorgan. Please state your question.
Yes, thanks. Hi, guys. So wondering, you mentioned the success and you're happy with the performance for Avaya, but specifically just want to check-in on where you are on the ramp of things like the tools to help the acceleration of deployment, migrations over to RingCentral, whether all of the channel trainings are complete? In other words, are you fully ramped or is there still a couple more milestones that we should be looking for to see even bigger contributions coming out of the partnership?
Yes. Let me take that. So in Q2, we actually so we've been at migrations for a while, as you can imagine, even before the Avaya partnership was done. But in Q2, we actually delivered more automation on the migration scripts. So as far as migration scripts go, I think we have fully deployed that working with Avaya and we feel pretty good about it.
And then from a product standpoint, it's a journey. I mean, you saw that we launched ACU sort of 2.0. We launched it internationally in U. K, Canada, Australia, and we launched it more broadly across Europe in H2. So that's a journey.
Got it. And then one follow-up, Nitesh, maybe for you. Looking at the go to market motions that you have now, how much savings
have you gotten on the travel, etcetera, from COVID-nineteen? And how much of that maybe will you
be able to hold on to permanently post COVID given the success you're seeing in the setup and the
go to market motion you have announced?
Yes. No, I think it's hard to exactly quantify for you, although we have the exact numbers. But look, we do have a lot of discretionary spend, not just travel, but events, customer events, employee events, all those are getting repurposed for R and D and go to market. So post COVID, yes, I mean, this is going to be a wake up call for all companies to make sure we look at all discretionary spend and tighten the belt. So a fair amount of discipline is going to go on and I think we'll see some more leverage going forward.
Our next question comes from Terry Tillman with Truist Securities.
Yes. Good afternoon, gentlemen, and congrats as well for me on the quarter and the outlook. I guess, maybe the first question is, as you're further into the opportunity with Avaya, what have been some of the early learnings and how do you see this opportunity playing out as it relates to actually driving ARR either this year or next year compared to just months ago?
And then I had a follow-up. Yes. I'll take the first part and I'll let Mitesh answer the second part of it. So the first part, early progress is great. We've onboarded 2,000 plus partners.
The pipe is very healthy. And as little as a quarter, we had several large deals in Q2, which feels good. And it's broad. We had wins in retail, higher ed manufacturing, the BPO space. So it's a broad vertical landscape.
So all the fundamentals are good as we expected, and it continues to be for the second half as well. Madhu, I'll let you answer the second half of the on the financials.
Yes. No, now the CFO is trying to temper expectations. Thank you, Anand, from doing a marvelous job there in setting great expectations. No, all good what he said. Look, in terms of the contribution for the quarter, we had a $1,000,000,000 revenue business.
So it doesn't quite move the needle, so it was immaterial in terms of contributions for this quarter. And no change to the expectations. We do expect this to start take the ramp to start to take hold in Q4 of this year and then continue to in 2021.
Okay. And Mitesh, I think in your prepared remarks, I like this phrase layers of growth. So whether it is Avaya, Atos, AT and T, Microsoft Teams integration, Engage, I'm sure I'm forgetting about 5 or 10 of them. But investors ask
us lots of questions because
they're curious about these opportunities. How do we frame this as it relates to maybe the growth profiles as we move into next year? And do some stand out more than others? Just a little bit of help on all these catalysts kind of confluence of all those catalysts. Thank you.
Yes. No, I'd say it's yes, Terry. So yes, we do have multiple catalysts going on. But if I can summarize these catalysts in, let's say, 2 buckets. Bucket number 1 is expansion of market and bucket number 2 is, call it, strategic partnerships.
Both are starting to ramp in this year. So if you look at the move of market, if you look at the bookings for mid market and enterprise, over 60% of our office booking came from that segment. We also announced a 100,000 seat win from Atos. And I will tell you that we have more deals of this size in the pipeline. Timing of these large deals is unpredictable, but customers are evaluating RingCentral for work from anywhere environment, I will tell you that.
So that's sort of bucket number 1, which is expansion, more expansion upmarket. And second is, let's lump these things together into partnerships, Avaya, AT and T Auto. I mean, the play there is expanding our reach to a broad PBX install base. That's one international diversification in the second one. And Nikolay asked about the cost of acquisition.
It does lower our cost of acquisition. So, I think these are the 2 big long term layers of growth. And the way we are thinking about this business is it's an organic distribution strategy for us. So going forward, we will give you color on each and every partnership, but it's going to be hard for me to break out individual pieces the way I did for ACO this time.
Thank you. Our next question comes from George Sutton with Craig Hallum. Please state your question.
Thank you. I wanted to poke a little bit more at the international expansion opportunity. As you're obviously working with a growing list of both strategic and channel partners around the world, can you give us a sense of kind of where you are and what you see as the duration of growth opportunity? How are you planning to expand outside of the U. S.
Either through these partners, through your own traditional organic growth means? I think that would be helpful to understand.
That's a great question. I'll take that. So the first vector is our strategic partnership. That's where Otos and UNIFY makes a big difference in extending our reach internationally, and we already see joint pipe building up in Europe, which traditionally has not been a hot a play for every play in. But we also have a direct sales presence in U.
K, in France, in Australia, and we continue to do well there as well. But the primary vector of growth right now will come from the partnerships.
Got you. Curious, clearly on the distribution side with the Atosys and AT and Ts and Avaya of the world, you have a distribution advantage. I think what we get challenged by clients on a lot is
trying to explain the advantage you have from a product perspective. And for
years, Vlad has talked about out investing everyone. Wondered if you could in a world where everyone has a platform of integrated capabilities, how are you trying to define your unique competitive advantages on the product delivery side? Thanks.
Lyle, do you want to take it? So while Vlad is getting on, so this is how I would put it. We look at this broadly for us. 1st, it is the different modes of message, video, phone, the whole platform coming together. Phone is mission critical and we are the level of enterprise feature depth we are adding on the phone system is best in class.
The second, as I look at it, is elements like the work we are doing on security, on user experience of unified application is a major product differentiator for us. The third thing I'd call out is just trust the fact that we have been on Five9s from a reliability and security standpoint for a few quarters now. Again, it makes a massive difference. And the 4th thing I would call out is just the international footprint. The geographic footprint we have of where Global Office is available and works natively is again, there's a huge and wide moat around it.
So all of these come together to make the product clearly differentiated. But on top of that, what also works is our ability to work with our partners to quickly create joint products, to quickly make sure that we can meet their security requirements, which are very stringent as well. So those things then finally come together as the icing on the cake to make these partnerships, these distribution models work better than most.
Yes. Let me just add to that. And, Amit, you can just
add it, but
I'll just double click. Look, firstly, we do believe we have a differentiated platform, message, video, phone. If you remember, George and others, for some time, I was saying, well, hey, the only other provider out there with a similar fully encompassing vision is Microsoft. But with the latest news Friday and today, it seems that they would be deemphasizing the voice part if we understand what they're saying. But outside of that, the statements do hold.
So we do have differentiated approach in these modalities. Clearly, we are the strongest on the phone system side and that keeps on carrying the day for us. Our wins with AT and T, with Avaya, with Atos and just going in chronological order here are a testament to that. Do not underestimate our video efforts. We know we're not in the lead now yet, but can tell you we're working very hard on it to close all gaps.
So it will be getting incrementally better and will be a world class product. And our messaging is pretty good as well. So net net is far and long ways from being commoditized. But should we ever get to this point, you already said it, we do have this inherent distribution advantage. And all things being equal, we think it will I don't know if it will carry the day, but certainly will help.
But all things not being equal, as are not now, remember, our from day 1, you've known us and until now, our biggest issue is access. We win way more than we lose in head to head comparison or compete against the entire field. So where we don't win is where we're not at the table. And people like AT and T, people like Avaya, people like Aga should make those cases a little harder to find to where we're not even at the table. And that's what we're banking on.
And again, so far, so good. And especially, I think, Anand already mentioned, we have quite a bit of effort in specifically making these partnerships to be much more turnkey, much more streamlined and also much deeper with migration tools, with custom endpoint support
with back office integrations that are also part of the integration tool scenario, for example, with Avaya.
So there is a lot more going on, and
we think it's to a good end.
So yes, we feel very good about it strategically. Way. Thank you.
Our next question comes from Michael Turrin with Wells Fargo. Please state your question.
Hey there. Thanks. Good afternoon. Mitesh, you're again, I mean, you've referenced it multiple times showing strength across multiple key metrics. EMEA growth in SMB it
looks like it picked up
a little steam here. Can you maybe talk through some of the key factors driving that uptick as that one surprised us a bit more than some of the others here?
Yes. No, I'd say it's a good observation, Michael. Yes, we did see strength in SMB as well this time, especially in new logos. A couple of things are happening under the hood, if I were to take it a click below for you. Our brand is resonating.
We are seeing strong evidence of growth in e commerce. And actually what's happening is we are spending less money in acquiring these new logos in marketing. So I think the combination of these 2 or three trends is actually helping our CAG being lower, versus the LTV. And but going forward, I think the right bogey to target is about 15% -ish in the overall SMB space, but near term trends do indicate that we are seeing some steam in self serve and e commerce. Got it.
Thank you.
Our next question comes from Samad Samana with Jefferies. Please state your question.
Hi, good afternoon. Thanks for taking my questions. So I guess I just wanted to follow-up on the Aptose partnership. If you get you initially announced a partnership with them at the beginning of 2020 and now this is a pretty significant expansion. I'm curious maybe what the proof points were in that 6 month period that made them want to extend the partnership?
And then, Mitesh, as you think about those 100,000 plus deals that are in the pipeline, are those following these partnerships that you guys have ramped on? Or were those really already in the pipeline before the ramp of ACO and Atos? Thanks for taking my questions.
Yes.
Go ahead, Amit.
No, I can just answer the first part of the question and then I'll thankfully delegate the second half. Mitesh, so the first half was just, 1, the first few months of the partnership, the traction with the joint sales force is very we were a part of the digital workplace portfolio of Atos and the message to their customers was resonating hugely. And then COVID happened. And so immediately, they saw the difference this could make by sending it across the unified base as well. So both of those, the traction of the portfolio to their enterprise customers and then COVID first came together, hey, this extension only makes sense.
And that's how this, I guess, this happened. Patish, I'll transition the rest to
here. Yes. Hey, Samad. So I think the second part is it's the scale that gets scaled, correct? And yes, it's a mix actually.
We had some in the pipe. We're getting more with these partnerships. So I think it's starting to spin up a virtual circle for us here.
Thank you. Our next question comes from Will Power with Robert W. Baird. Please state your question.
Okay, great. Thanks. Yes, I guess
I wanted to come back to some of the earlier comments on contact center that being a key part of roughly 50% of your larger deals. I just have wondered generally if you could kind of characterize the demand you're seeing there and maybe just talk a little bit about the roadmap going forward to make sure you're positioned for that demand. Obviously, you've done a lot organically on the digital side, but do you need to do more and bring more of the capabilities in house as opposed to partnering with inContact and others over time?
Yes. It's a good question. I mean, our partnership with inContact remains as strong as it has ever been. And obviously, we are investing in integrating Engage Voice and Engage Digital strongly RCO platform. So the product efforts are on as we have always shared with you guys.
But as we look at the sales side, simple things like last year, we shared Arch Capital and the UCaaS win there. So now we are basically seeing them not just deploy UCaaS on an accelerated basis, but they're also picking up on needing to deploy a strong CCaaS solution. So that's where our NContact partnership makes a difference because their integration, the voice quality of the RCO platform, the routing capabilities, all of it come together where Earth Capital extended the UCaaS footprint to CCaaS. That's why you saw that a large percentage of our large deals also then become contact center deals and that's a key thing. Now going forward, I think companies are looking at CCaaS and UCaaS decisions and we feel we are well poised.
Okay. Thank you.
Our next question comes from Meta Marshall with Morgan Stanley. Please state your question.
Great. Thanks. Maybe just a question on how your comment you noted that conditions have improved throughout the quarter, but I would guess that some of your customers are still a little stressed. So are you accommodating them with payment pauses or reducing seat counts or has it caused any change to forward contract structures? Thanks.
Yes. Hi, Meta. So yes, both are true. We are accommodating so customers are seeing a couple of things. We're seeing 2 trends.
Trend number 1 is the payment deferrals. We did see customers approach us more in April and then subsiding in May June for payment deferrals. So we are accommodating them and then in the books we have taken enough appropriate reserves to cover for the exposure. And the second part we are seeing actually is an interesting one. It's a bit counterintuitive.
We are seeing one that you would expect that customers are not paying us upfront for annual prepay. That's why you see some headwinds in deferred revenue. But in fact, customers are signing up for longer duration contracts, which does bode well for the long term structural growth of UCaaS. So we are seeing those three trends, and this is how we've accounted in the guidance.
Got it. Thanks.
Yes. You bet.
Our next question comes from Kash Rangan with Bank of America Merrill Lynch. Please state your question.
Hi, thank you very much for the call and congratulations. I'm wondering if you guys have a perspective how in long term the lifetime value of a customer also Trevor will change as you have video? How does it change retention, ARPU, uptick, etcetera, just high level thoughts there? Because you certainly, as you said, you have a very unique proposition, which is unlike Zoom and Slack in the marketplace, but how does this play out in the business model super long term? Thank you so much.
Yes. Let me take that cash. So if you look at the way unit economics, right? So it's driven by 2 things in my mind. 1 is churn and second is upsell and net retention.
Once we look at if you layer on, you said 2 things. One is video and the product and second is partnerships. So let's take video first or the product itself. Given that we are expanding our platform with MVP, it does put in more barriers to exit and make our base stickier, which would be an inhibitor of churn, so reduced churn, which would help the lifetime value. So that's part 1.
Part 2, with the partnerships, again, lower cost of acquisition to get these customers. And again, because these partners are incentivized to keep hang on to the customers, that means less churn and more upsell and retention, so higher lifetime value. So if you package it all together, long term, our sustainable economic margins are going to be trending up higher than we currently have because of these two long term trends.
Our next question comes from Rich Valera with Needham and Company.
Let me add my congrats on nice Questions on AT and T. It sounds like momentum continues to build there, but the last couple of quarters you've given fairly specific quarter over quarter gains that you were seeing there. Wondering if there's any color you can add on how AT and T bookings trended quarter over quarter? And if there's anything you're willing to say about AT and T perhaps transitioning from a headwind, which I believe you said they were in 2019 and when they might become neutral or a tailwind to your overall growth rate? Thank you.
Yes. Thanks, Rich. I'll take that. Again, classic, again, in Wall Street, if you give a metric once, you've got to be prepared for giving it every single time.
So I
will say, yes, we did see strong bookings in AT and T again this quarter. We did see some increase in seller participation. And as to so both trends what you saw last quarter did continue. We are seeing some traction in upmarket as well. A and P was supposed to be initially an SMB play, but now we're seeing some upmarket there.
And as it relates to the overall guidance, you called it, Rich, overall growth because of the installed base still churning and our new bookings not quite offsetting that, this for the year, AT and T is turning to be less of a headwind this year, and I think it's going to start to dissipate in 2021.
Got it. Thanks, Pitesh.
Yes. You bet.
Thank you. Ladies and gentlemen, that concludes today's conference. All parties may disconnect.